Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Profile Systems & Software A.E. (ATH:PROF) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Profile Systems & Software A.E's Net Debt?
As you can see below, Profile Systems & Software A.E had €4.39m of debt at June 2019, down from €4.92m a year prior. But on the other hand it also has €13.9m in cash, leading to a €9.51m net cash position.
How Healthy Is Profile Systems & Software A.E's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Profile Systems & Software A.E had liabilities of €14.7m due within 12 months and liabilities of €3.82m due beyond that. Offsetting these obligations, it had cash of €13.9m as well as receivables valued at €9.21m due within 12 months. So it can boast €4.56m more liquid assets than total liabilities.
This short term liquidity is a sign that Profile Systems & Software A.E could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Profile Systems & Software A.E boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that Profile Systems & Software A.E grew its EBIT at 12% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Profile Systems & Software A.E can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Profile Systems & Software A.E may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Profile Systems & Software A.E actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
While we empathize with investors who find debt concerning, you should keep in mind that Profile Systems & Software A.E has net cash of €9.51m, as well as more liquid assets than liabilities. And it also grew its EBIT by 12% over the last year. So we don't have any problem with Profile Systems & Software A.E's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Profile Systems & Software A.E's earnings per share history for free.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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